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The No Data Option in Securitisation Disclosures

By Burkhard Heppe

CTO

Published Tuesday 18 February, 2020

Can asset-backed securities with missing data be compliant with securitisation regulation?

We recently published an article on The importance of collecting historical recovery data for NPL transactions where we highlighted the challenges for reporting entities (1) of asset-backed securities (ABS) backed by non-performing loan (NPL) to meet the disclosure requirements from the securitisation regulation.

Over the last two years, ESMA has specified detailed reporting templates that demand comprehensive data deliveries from data providers applicable to both securitisations of performing loans and NPL. On the NPL Markets platform we have received numerous data tapes for NPL transactions and thus far no data tape has included all the data fields required by ESMA or the similarly comprehensive NPL data templated published by EBA. Also, all performing loan securitisations that submitted loan-level data to comply with the ECB ABS loan-level initiative had optional data fields missing. Hence, it can be expected that securitisations will not be able to submit all requested data.

Does this mean that all European securitisation will shortly be in breach of the securitisation regulation? No, the regulation envisions that reporting entities will not be able to report all fields for all loans and hence for many fields allow the option to enter ND1 to ND5 - indicating no data. Table 1 shows the definition of the different no-data types.

Table 1: No-data options defined by ESMA for the reporting of underlying exposures.

Table 1: No-data options defined by ESMA for the reporting of underlying exposures.

Given the regular use of the no-data option in the ECB loan-level initiative, it appears likely that at least some securitisations may become non-compliant once the detailed disclosure rules become effective, which is expected to happen around March 2020.

On January 17, 2020, ESMA published a new consultation paper that proposed certain thresholds around the use of the no-data option that, if accepted, helps the securitisation data provider with their compliance even in the presence of missing data.

The consultation paper provides a positive answer to our headline question; ABS with missing data can be compliant. However, ABS that have missing data in fields that do not have a no-data option or ABS with too many fields using the no-data option will not be compliant.

The securitisation regulation EU 2017/2402 requires public securitisation transactions to report to accredited securitisation repositories (SR) and for the SR to verify that the no-data options contained within a data submission, “are only used where permitted and do not prevent the data submission from being sufficiently representative of the underlying exposures in the securitisation.”

The recent consultation paper aims to ensure consistent application of the requirement to be “sufficiently representative” and ESMA has issued guidelines on how to verify whether a data submission is “sufficiently representative” by using the threshold system. In principle, there are two thresholds for so called legacy assets and legacy IT systems, respectively, with their own thresholds. However, ESMA currently proposes the same field numbers for both thresholds (Table 2).

  1. The first threshold covers the situation where a reporting entity is unable to provide information for a limited number of underlying exposures for several fields (legacy assets). The cut-off point represents the percentage threshold and is proposed to be set at 10%.
  2. The second threshold covers the situation where the reporting entity is unable to provide information for many or all underlying exposures for a few fields, for example because such information is stored in other databases and cannot be retrieved in the short run without significant expense (legacy IT systems).

Hence, if a data field has ND1-4 entries for more than 0% and less than 10% of all field values, then the field counts towards the legacy asset threshold and with missing data for more than 10% towards the legacy IT system threshold. ND5 entries are not considered for the purpose of the no-data thresholds. Table 2 shows the proposed acceptable number of fields per exposure category for legacy assets and legacy IT systems, respectively. These thresholds will be gradually tightened over time as market participants are able to improve their data collection and reporting processes, but there is no predefined schedule of such tightened thresholds at present.

The consultation paper clarifies that the thresholds for NPL securitisations are applied cumulatively from the primary template for the asset-class of the underlying exposure (e.g. residential mortgage) and the NPL add-on.

Table 2: Proposed thresholds for the no-data option as proposed by the ESMA consultation paper.

Table 2: Proposed thresholds for the no-data option as proposed by the ESMA consultation paper.

Let’s look at an example of a securitisation of non-performing loans backed by commercial real estate. ESMA requires 227 CRE data fields of which 75 have the no-data option plus the 203 fields from the NPL add-on that all have the no-data option. We assume that the reporting entity can provide 176 CRE data fields and 50 NPL fields, i.e. 51 CRE fields and 153 NPL fields are missing. The NPL add-on fields do not create a problem as all fields have the ND1-4 option and the threshold equals the number of fields. The 51 CRE fields would also not create a problem in this example even if all fields were of the same threshold type as the thresholds for CRE and NPL add-on are applied cumulatively. However, we understand that the submission would fail if at least one CRE field that does not have the no-data option has at least one missing value.

The example suggests that the most serious challenge for reporting entities may not arise from meeting the two proposed thresholds, but from mandatory fields that either do not have a no-data option or that have an option to use ND5 only, but where ND5 is not a valid choice as the field is applicable. For example, consider an NPL securitisation with defaulted consumer loans. The CMR template for consumer loans (Annex 6 CMRL54) defines the Number of Days in Arrears as a field without the option to use ND1-4 nor ND5. In our experience this field might well not be available where a sponsor has purchased the NPL from a bank when the loan was already in default and terminated prior to the securitisation.

The threshold values were calibrated from experience with data submissions as part of the ECB ABS loan-level initiative and appear generous meaning that for performing loan ABS most data providers should manage to pass the thresholds. However, for NPL ABS there has been no experience from the ECB initiative and hence all NPL data fields in the current proposal allow for the ND option. As mentioned, given the leniency granted to the NPL add-on fields we expect the performing loan templates to be the major burden for NPL ABS as many of these fields are difficult to provide and may no longer be relevant. If a field is no longer relevant the ND5 option can be used if available. In our example of the defaulted consumer loans it can be argued that the Maturity Date (CMRL22) is no longer applicable after termination and in this case the ND5 option is allowed.

In summary, reporting entities must work through their available data now to determine compliance or the need for data enhancements. The disclosure requirements are expected to become law in March 2020. The first securitisation repository is expected to be designated in Q4 2020. Having met the ECB loan-level requirements in the past does not imply that the ESMA requirements are automatically met. Reporting entities for NPL securitisations are particularly challenged and it remains to be seen how data repositories and the relevant authorities will handle situations like the once mentioned above where fields that do not have the no data option cannot be delivered.

Footnotes:

  1. Reporting entities can be the originator, the sponsor or the securitisation special purpose entity (SSPE)




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